The new
Prime Minister of Canada, Justin Trudeau, promised in his winning electoral
platform to run reasonable deficits in order to stimulate the economy. This is
the first time in recent memory that a G7 country is openly advocating running public
deficits. Other countries have incurred deficits but have excused them as
temporary. In this case the advocacy is explicit.

When
I was Canada’s ambassador to the OECD in the late nineties, Canada had the
worst deficit in the G7 Club, which prompted the Wall Street Journal at the time to label Canada “an honorary member of the Third World.”But in a few short years, under the Liberal Government of
Jean Chretien, the deficit was transformed into a surplus and Canada became a
world model of successful deficit management.

Are we
now witnessing a return to the ‘bad old days’? Should we be afraid of deficits
and their accumulation over time? Is Canada behind the times or, on the contrary,
ahead of the pack?

At
stake is a simple question, which has been obfuscated by a priori ideology: is
debt always bad or sometimes just what is most needed?

On the
one side, there is the so-called ‘German’ school of thought — unreservedly
against deficits. It is instructive to note that the German word for debt is ‘schuld.’ Interestingly, the German word
for ‘guilt’ is also ‘schuld.’ Hence,
an indebted person or organization must be ‘guilty.’ The German aversion to
debt explains in part the Eurozone espousal of austerity and its opposition to
deficits. Live within your means is the supreme motto.

In
contrast, the ‘Anglo Saxon’ concept of debt is different and predates Keynes. Modern
capitalism has been built on a philosophy of borrowing and lending. Cheap loans
for investment and consumption and the use of ‘OPM’ (Other People’s Money) to
build fortunes have been the rule, not the exception. In fact, very few of
today’s billionaires have reached their high wealth by using only their own
money. The leveraging potential of OPM is awesome and both individuals and
governments in the Western World want to jealously preserve a good credit
rating in order to borrow even more. In case things go bad, there are bankruptcy
laws to protect the borrower. Presidential candidate Donald Trump has freely
admitted that he has used U.S. bankruptcy laws four times to restructure his
companies and increase their profitability. No guilt there.

Given a
possible new acceptance of deficit-spending in the G7 countries, which may
result from Canada’s example, here is a proposed four-point checklist, free
from ideological beliefs, to try and allay irrational fears regarding
indebtedness while reinforcing the rational ones.

1. What is the purpose of debt?

Debt
creation to build infrastructure or, for that matter, to invest in general,
makes a lot of sense. This is what the Trudeau government intends to do. In
fact, even borrowing to stimulate private sector consumption may make sense when
the economy is dragged down by high unemployment and unused capacity.

But
there are two negatives to be avoided like the plague: borrowing to meet
current public expenses and even worse, borrowing to pay back old debt with new
debt. This was the trap that Canada was in in the nineties but managed to
escape from. This is also the trap that Greece has been in for many years. A
losing strategy.

2. What is the rate of interest?

In the
stagflation of the seventies when governments were borrowing at above 15
percent, debt accumulation became very dangerous. Today the situation is quite
different. Borrowing can be done at absurdly low interest rates of less than two
percent, something that was unimaginable just a few years ago.

Furthermore,
the advent of negative interest rates, where lenders actually pay to lend, is a
game changer. There is presently a huge amount of capital in the world,
disproving the popular perception of capital scarcity. Monetary capital can be
created not just by central banks but by many other formal and informal
organizations (credit cards, bitcoins, coupons etc.). Some lenders now consider
it is bestto park their money for a
fee, as you would be willing to pay to park your expensive car in a safe
garage.

3. How has the maturity date changed?

The
advent of super abundant capital has also led to another counter-intuitive
phenomenon: distant maturity dates for loans. We now see the emergence of
hundred-year loans. Surprisingly lenders are willing to wait that long before
repayment – another example of the plethora of capital. These loans are
spreading both in the public and private sectors. We are very far from the
Mafia loan to be repaid by the end of the week at 10 percent interest.

4. Who owes the money, and to whom?

This
is one of the most important and most overlooked questions. When you hear
statements like ‘the whole world is indebted’ the absurdity of this proposition
should be obvious: if the whole world is indebted, to whom do we owe the money?
The planet Mars? For every debtor there must be a creditor. If we are all
debtors we must all be creditors – by definition.

The
only exception is ecological debt. If we destroy our environment and ignore
climate change, then Homo Sapiens incurs serious debt and there are no
creditors. But in the case of financial debt the identity of the debtors and
creditors is most important.

For
example, the Greek public debt is owed to external creditors. It represents 175
percent of GSP and is causing legitimate alarm. But Japanese public debt is
over 200 percent of GDP and does not inspire fear at all, because it is owed to
the Japanese people. It is an intra-family arrangement and as such, constitutes
a form of internal transfer mechanism, which is accepted by the people of that
country and is of little interest to foreigners. In addition, a debt denominated
in a country’s own money rather than a foreign one is less dangerous, even if
held by foreigners. The country cannot go bankrupt since it can just print more
money.

Of
course, inflation is a possibility but Japan has suffered no inflation in spite
of its very high debt/GDP ratio. In fact it is suffering from acute deflation, which
is the opposite of inflation, as is Europe. When an economy operates well below
its production possibility, more capital stimulates more production not more
inflation.

What should
we conclude regarding Canada’s return to deficits? After the 2008 crash,
governments first spent a lot, mainly to refloat ailing banks, then went into
an austerity and debt-reduction mode with alarm bells sounding about debt
ceilings, the debt apocalypse, etc.

Today
and tomorrow, if the four conditions mentioned above are met, it would be
almost masochistic not to borrow. If
we reject the irrational feelings of guilt and impending doom, intelligent
deficit spending, via public borrowing, may well swing the pendulum back to the
economic centre and offer a cure for the ‘nearest’ enemies of the Western World
which are now not inflation but low growth and deflation.

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